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Hitting SKEW for SIX

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  • Liu, Zhangxin (Frank)
  • Faff, Robert

Abstract

In this study, we propose “SIX” as a new forward-looking index of negative market skew derived from state-preference pricing. Specifically, SIX is a forecast of the ratio of lower to upper partial moment volatility over a 30-day horizon, for SPX market returns. Using SPX options data from 1996 to 2013, we conduct a comparison between SIX and the CBOE SKEW index. First, we document that the daily change in VIX and SIX (SKEW) are negatively (positively) related. Second, we show that the daily change of SIX (SKEW) adds (does not add) significant explanatory power for predicting the one-day ahead return. Third, though biased, SIX produces an efficient forecast of future physical skewness. In contrast, there is no statistically significant relationship between SKEW and physical skewness. Collectively, our results suggest that as an indicator of institutional anxiety, both theoretically and in practice, SIX (SKEW) is a more than useful (questionable) complement to VIX.

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  • Liu, Zhangxin (Frank) & Faff, Robert, 2017. "Hitting SKEW for SIX," Economic Modelling, Elsevier, vol. 64(C), pages 449-464.
    • Handle: RePEc:eee:ecmode:v:64:y:2017:i:c:p:449-464
    DOI: 10.1016/j.econmod.2017.02.026
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    6. Bevilacqua, Mattia & Tunaru, Radu, 2021. "The SKEW index: Extracting what has been left," Journal of Financial Stability, Elsevier, vol. 53(C).
    7. Mora-Valencia, Andrés & Rodríguez-Raga, Santiago & Vanegas, Esteban, 2021. "Skew index: Descriptive analysis, predictive power, and short-term forecast," The North American Journal of Economics and Finance, Elsevier, vol. 56(C).
    8. Elyas Elyasiani & Luca Gambarelli & Silvia Muzzioli, 2018. "The properties of a skewness index and its relation with volatility and returns," Department of Economics 0133, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".
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    10. Bevilacqua, Mattia & Tunaru, Radu, 2021. "The SKEW index: extracting what has been left," LSE Research Online Documents on Economics 108198, London School of Economics and Political Science, LSE Library.

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    More about this item

    Keywords

    Skewness index; Risk-neutral moments; SKEW; VIX; State-preference pricing;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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